How Seattle schools botched their budget by $33 million
Seattle School District staffers knew about key elements of the district's $33 million financial shortfall for more than a year, but no one told the School Board or the public until a few weeks ago.
That's one surprising fact that emerged from interviews with school-district officials and others about the embarrassing disclosure three weeks ago that the district finished the past school year with a $21 million shortfall and must cut another $12 million from this year's budget.
The interviews also found:
• The School Board voted on the 2001-02 budget without being told by district officials that it included a $7 million mistake made by counting the revenue from about 1,600 students twice.
• In January, when the district instituted a hiring freeze to save money, staffers told the board the freeze was mainly due to a weakened economy when, in reality, part of the reason was the still-secret $7 million double-counting mistake discovered six months earlier.
• The district didn't change its budget to cover the full cost of its new contracts with employees, even though the staff knew those costs.
• The district spent $3.4 million more on substitute teachers than it had allotted, going 50 percent over budget. It was the third year in a row the district had overspent on substitute teachers by millions of dollars.
• To solve last year's shortfall, the district has to wipe out its rainy-day fund, which it had spent seven years building.
• The district has no chief financial officer or budget manager. In the past five years, key personnel have spun through the district at a disruptive pace: two different chief financial officers, two chief operating officers, three budget managers and three human-resources directors alone.
• At first, Superintendent Joseph Olchefske cited computer software problems as a big reason for the financial crisis. But he now says it wasn't so much a problem with the software but a lack of communication among his managers and staff.
• No one — including Olchefske and the School Board — gets the kind of reports that other school districts rely on to catch this sort of problem before it happens. Even Olchefske didn't learn the extent of some of the budget problems until months after his managers discovered them.
"We do not have the financial information systems that tell us, on any real-time basis, how much we're spending," said Mark Green, the district's general counsel. "It's surprising, yet true." But, Green pointed out: "We didn't waste this money. We spent it on good things. We spent it on kid things."
Several School Board members interviewed still lack a full understanding of the $33 million budget crisis and why it occurred.
Steve Brown, board member and chairman of the board's audit and finance committee, said he has trusted the district's numbers.
"Perhaps we assumed too much," Brown said. "We will have to think about whether some of our behaviors need to change."
Today, School Board members will learn more about how the district ended up $21 million short for the past year, or about 5 percent of its $435 million budget. Olchefske is expected to outline $12 million in cuts needed to balance this year's budget and to explain what the 47,000-student district will do to prevent future money snafus.
It will be difficult. Teacher salaries and benefits make up the largest chunk of the money spent on schools. But teachers cannot be cut since they were not notified of layoffs by May 15, the cutoff date required by state law.
And the district, without a rainy-day fund, is like a person who pushes his credit card to the limit. The schools now will have difficulty in covering surprise expenses and any future disasters.
Mistake snowballs
The story of the district's budget woes goes back to January 2001, when a budget analyst mistakenly counted about 1,600 students twice as he was estimating the district's revenues for the year. He counted them once as students in vocational-education programs and then again as regular-education students. The result: He added $7 million in budget revenues from the state that the district was never going to get.
The error was caught five months later, in June 2001, shortly before the School Board was set to pass the budget for the next school year. The staff decided it was too late to try to correct the error in the budget document before the board, said a former finance employee who asked not to be identified.
The district's budget office, run by then-Chief Financial Officer Geri Lim, took a wait-and-see approach, hoping that more students than expected would show up in September, which would bring in more revenues, the former finance employee said.
No one told School Board members, who approved the budget with the $7 million error. The supposedly extra $7 million ended up being included in the general fund and spent throughout the district.
In fall 2001, as the district tried to close its books for the 2000-01 school year, Lim and her staff decided to push $5 million in expenses to next year's budget and pay them in the next fiscal year. That allowed the district to balance its 2000-01 budget.
But this accounting maneuver dumped $5 million in expenses into a budget that the School Board had already been approved a few months earlier. Board members weren't fully told about the $5 million shift.
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Olchefske said, "I wasn't fully aware of the costs that were being carried forward. I didn't know the total."
Brown said of the $5 million expenses shift: "I expected to have this information — whether or not the superintendent had it. If he didn't have it, it is his responsibility to make sure he has it and therefore, that I had it."
Lack of checks, balances
The Seattle School District doesn't do the kind of routine monitoring of spending that other districts take for granted.
In Edmonds, for example, each month the budget officer and the superintendent spend about an hour reconciling spending with budgeted amounts. It is much like balancing a checkbook each month and examining a bank statement.
In Bellevue, the district's head financial official must personally approve any hires or school-building expenditures that go over the approved budget.
If the Seattle School District had used such accounting and budget practices, it might have caught budgeting errors, flagged overspending and fixed mistakes when they were less expensive.
"Ultimately, no one was watching what was really happening," said the former Seattle district finance employee. "To me, that's the biggest failure in all of this."
In January of this year, Lim and her staff hoped to recover up to half of the $7 million shortfall by freezing hires in the central offices and cutting travel and spending on supplies, the former staffer said.
When Lim told the School Board about the freeze, members said, she blamed it mostly on lower state revenues and the slumping economy. She didn't tell them about the $7 million mistake and other problems.
Olchefske said he didn't know about the vocational-education blunder until January and believed the mistake was at worst $2 million.
About this time, Budget Manager Shirley Kolm quit.
Evidence of even more serious problems became clear several months later, in June, when the district's accounting department completed its first projections of anticipated year-end balance. It showed a gap of nearly $21 million.
Bob Rhea, the district's accounting manager, gave the information to his boss, Lim.
Lim was skeptical of his numbers, Rhea said.
He figured the "projections could be off."
Rhea said he left it up to Lim and her budget department to figure out whether the $21 million shortfall was real. But Olchefske said Lim didn't share that estimate with him or Chief Operating Officer Raj Manhas.
Instead, she told them the budget for the coming year, which was on the brink of being approved, again had to be cut, this time by about $8 million.
The board approved the budget in July with one dissent. Mary Bass, a new board member, voted no because "they didn't have any answers" about why the district had to cut again, she said.
In August, Olchefske was told by Rhea about the shocking $21 million gap.
"Nothing I've experienced told me we would end with a result like that," Olchefske said. "I absolutely did not believe it."
The discovery was particularly embarrassing to Olchefske, a former investment banker. He was hired seven years ago to put the district's finances in order as its chief financial officer. He was named superintendent in 1999.
Olchefske hired Geri Lim as budget manager seven years ago and she later was promoted to chief financial officer. He said his trust in her work faded this past summer. "We were having declining confidence," Olchefske said.
"This happened on my watch and as a leader you have to take responsibility for it. That being said, the problem is large and ultimately you rely on people, and certainly Geri and other people share the responsibility for this."
She resigned in August, saying she wanted to take care of her ailing parents in Hawaii.
Lim said she's not at fault. "The district has serious problems and it has known about those growing problems for quite some time," she recently said. "I personally don't know of a single school district that I am in touch with in the nation that doesn't have rather severe problems as well."
She declined to be interviewed at length.
Olchefske calls for help
In early September, Olchefske held one-on-one and small-group meetings with board members to tell them about the crisis.
Dismayed by the huge shortfall and not knowing how it occurred, Olchefske asked the Seattle Education Association, former employees and consultants to help him figure it out.
A team of eight to 10 people met in a conference room nearly every day in September, trying to figure out when and how the budget problems had unfolded.
Olchefske and others worked out theories and figures on a dry-erase board in the conference room behind his office. One by one, they erased their theories when the numbers didn't work out.
Of the $21 million mistake, the team attributed $7 million to the vocational-education double-count of 1,600 students, and $5 million to carrying forward expenses.
There was still $9 million yet to be explained. They eventually came up with three explanations.
One, the group discovered a $3.4 million mistake — it had spent $10.3 million on substitute teaching but had budgeted for only $6.9 million.
Second, the district also realized it hadn't budgeted enough to pay for $3.6 million in personnel costs mostly from increases in its new labor contracts, officials now admit.
Third, Olchefske and his team attributed $2 million of the shortfall to lower revenues from the state due to the weakened regional economy.
Even now, officials still struggle to explain all the details.
By September, Olchefske and his staff had decided to cover the $21 million by raiding the $7 million rainy-day fund, also known as unrestricted reserve funds, and covering the rest with $14 million budgeted to pay back loans early. Those loans will have to be paid in years to come, he said.
Olchefske and Manhas acknowledge that the district clearly didn't have enough checks and balances in place to track how and where taxpayer money was being used.
"It's an issue of internal controls, reporting both up the chain of command and across the departments," Olchefske said.
"Budget folks and accounting folks should have been working more closely, even in budget development," Rhea said.
Olchefske has pledged to fix the problems, earning praise for his open approach from such union officials as Seattle Education Association President John Dunn. However, Dunn added: "This is his mess and he's got to fix it. If he doesn't, we will be saying something different later."
The School Board is conducting an annual review of Olchefske's contract and has the power to retain or fire him.
"Ultimately it's a question for the board to answer," Olchefske said. "Do I have their confidence?"
Linda Shaw: 206-464-2359 or lshaw@seattletimes.com. Christine Willmsen: 206-464-3261 or cwillmsen@seattletimes.com